Casualty Actuarial Society Credentials (ACAS/FCAS) Exam 6 (US) — Regulation and Financial Reporting (United States) Syllabus

Exam 6 (US) — Regulation and Financial Reporting (United States) syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Exam 6 (US) — Regulation and Financial Reporting (United States) in Casualty Actuarial Society Credentials (ACAS/FCAS), not a summary of it.

1. 1

   Insurance Regulation in the United States

   3 topics

   • The U.S. Regulatory Framework
     • State-based regulation and the role of the NAIC
     • McCarran-Ferguson Act and federal vs. state authority
     • Rate regulation systems (prior approval, file-and-use, etc.)
   • Solvency Regulation
     • Risk-based capital (RBC) requirements
     • IRIS ratios and financial analysis tools
     • Guaranty funds and insurer insolvency
   • Market Regulation and Residual Markets
     • Market conduct and consumer protection
     • Residual market mechanisms and assigned risk plans
2. 2

   Statutory Accounting Principles

   3 topics

   • SAP vs. GAAP
     • Conservatism and solvency focus of statutory accounting
     • Admitted vs. non-admitted assets
     • Key SSAP guidance for P&C insurers
   • The Annual Statement (Blue Book)
     • Schedule P and loss reserve disclosures
     • Underwriting and investment exhibits
   • Reinsurance Accounting
     • Ceded reinsurance and risk transfer requirements
     • Schedule F and reinsurance collectibility
3. 3

   Taxation and Financial Reporting

   3 topics

   • Insurance Company Taxation
     • Tax treatment of loss reserves and discounting
     • Revenue offset and unearned premium reserve
   • GAAP Reporting for Insurers
     • Deferred acquisition costs
     • Premium deficiency reserves
   • Investment Income and Surplus
     • Investment income reporting in statutory statements
     • Changes in surplus and capital management
4. 4

   Professional Responsibilities and Reserve Opinions

   3 topics

   • The Statement of Actuarial Opinion (SAO)
     • Required content and reasonable reserve ranges
     • Actuarial Opinion Summary and Actuarial Report
   • Actuarial Standards of Practice
     • ASOPs governing reserving and ratemaking
     • Materiality and risk-of-material-adverse-deviation disclosures
   • Government and Social Insurance Programs
     • Workers compensation regulation
     • National Flood Insurance Program and other federal programs

Exam 6 (US) — Regulation and Financial Reporting (United States) flashcards for Casualty Actuarial Society Credentials (ACAS/FCAS)

19 of 50 cards from the Exam 6 (US) — Regulation and Financial Reporting (United States) deck — real questions with worked answers.

1. Under the McCarran-Ferguson Act (1945), what is the relationship between state and federal regulation of insurance?

   It establishes that insurance is regulated primarily by the states and grants insurers a limited exemption from federal antitrust law, so long as the activity is regulated by state law and does not involve boycott, coercion, or intimidation.

2. What is the role of the NAIC, and does it have direct regulatory authority over insurers?

   The National Association of Insurance Commissioners is a standard-setting and support organization of the chief insurance regulators of the 50 states, D.C., and territories. It has NO direct regulatory authority; it develops model laws/regulations that individual states may adopt, and coordinates uniformity through accreditation.

3. What three core consumer/financial protections do state insurance regulators primarily seek to ensure?

   Solvency (insurers can pay claims), fair/reasonable rates (not excessive, inadequate, or unfairly discriminatory), and fair treatment of consumers (market conduct).

4. Name the main rating law systems used by states for property-casualty rate regulation.

   Prior approval, file-and-use, use-and-file, flex rating, no-file/open competition (informational), and state-mandated rates. They differ in whether and how rates must be filed/approved before use.

5. Under most state rating laws, what are the three statutory standards a rate must satisfy?

   Rates must not be excessive, not inadequate, and not unfairly discriminatory.

6. What is Risk-Based Capital (RBC) and what is its regulatory purpose?

   RBC is an NAIC formula that calculates a minimum required capital level based on an insurer's specific risk profile (asset, credit, underwriting, and off-balance-sheet risks). It provides regulators with capital adequacy standards and triggers graduated levels of regulatory intervention.

7. List the four RBC action levels for a P&C insurer, in order of decreasing capital adequacy.

   Company Action Level (Total Adjusted Capital, TAC, between 150%-200% of ACL-based threshold), Regulatory Action Level (100%-150%), Authorized Control Level (70%-100%), and Mandatory Control Level (below 70%). (Thresholds are relative to the Authorized Control Level RBC.)

8. Write the simplified covariance/square-root formula for P&C RBC ($R_0$ through $R_5$).

   $$RBC = R_0 + \sqrt{R_1^{2} + R_2^{2} + R_3^{2} + R_4^{2} + R_5^{2}}$$ where $R_0$ = off-balance-sheet/affiliate risk, $R_1$ = fixed-income asset risk, $R_2$ = equity asset risk, $R_3$ = credit/reinsurance recoverable risk, $R_4$ = reserve risk, $R_5$ = premium (written) risk.

9. In the P&C RBC formula, why is the square-root covariance adjustment applied to $R_1$ through $R_5$?

   It reflects the assumption that those risk components are statistically independent, so combining them by the square root of the sum of squares (rather than simple addition) recognizes diversification and avoids overstating total required capital. $R_0$ is added outside the root because affiliate risk is not diversifiable in the same way.

10. What is the IRIS system and how many ratios does it use?

    The Insurance Regulatory Information System is an NAIC early-warning solvency screening tool using 13 financial ratios (for P&C) compared against 'usual range' benchmarks to identify insurers warranting closer regulatory review.

11. What is the purpose of an insurance guaranty fund (guaranty association)?

    A state-administered mechanism that pays the covered claims of an insolvent insurer (up to statutory limits) by assessing the solvent insurers writing similar lines in that state, protecting policyholders and claimants.

12. How do post-insolvency guaranty fund assessments typically work, and what offset is often available?

    After an insolvency, solvent insurers are assessed based on their proportionate share of premiums written in the relevant line/state (a post-assessment model). Many states allow insurers to recoup assessments via premium tax offsets or policyholder surcharges over time.

13. Distinguish the admitted (licensed) market from the surplus lines (non-admitted) market.

    Admitted insurers are licensed in the state, file/justify rates and forms, and are backed by the guaranty fund. Surplus lines insurers are non-admitted (not licensed in that state), used for hard-to-place risks, are exempt from rate/form filing, and are generally NOT covered by the guaranty fund.

14. What are residual (involuntary) markets, and give two examples.

    Mechanisms that provide coverage to risks unable to obtain insurance in the voluntary market. Examples: assigned risk plans (auto), FAIR Plans (property), Workers' Compensation assigned risk pools, Beach and Windstorm plans, and JUAs (Joint Underwriting Associations).

15. What is the fundamental difference in objective between Statutory Accounting Principles (SAP) and GAAP?

    SAP is conservative and solvency-/liquidation-oriented, emphasizing the balance sheet and the insurer's ability to pay claims now (regulator's perspective). GAAP is a going-concern, matching-oriented framework emphasizing the income statement and earnings measurement (investor's perspective).

16. Under SAP, how are non-admitted assets treated and why?

    Non-admitted assets (e.g., furniture, certain agents' balances/receivables over 90 days, prepaid expenses) are excluded from the statutory balance sheet (charged directly to surplus) because they have little or no value in a liquidation and SAP is solvency-focused.

17. Contrast the SAP and GAAP treatment of acquisition expenses (DAC).

    SAP expenses acquisition costs immediately as incurred (no asset). GAAP capitalizes Deferred Acquisition Costs (DAC) and amortizes them over the policy term to match expenses with earned premium, producing smoother earnings.

18. How does SAP treat loss reserves with respect to discounting and the time value of money?

    SAP generally requires P&C loss reserves to be carried at full (nominal) undiscounted value, with only limited exceptions (e.g., certain fixed/determinable payouts like some workers' comp tabular reserves or by permitted practice). This is conservative.

19. What is the statutory accounting treatment of bonds versus the GAAP treatment?

    Under SAP, bonds (NAIC designations 1-2, higher quality) are generally carried at amortized cost. Under GAAP, bonds are classified as held-to-maturity (amortized cost), available-for-sale (fair value through OCI), or trading (fair value through income).

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